Eagle Daily Investor

Why Capitalism is Worth Defending against Marx Madness

scales of justice on a law book next to a gavel

“Capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine democratic societies.”

–Thomas Piketty, “Capital in the 21st Century” (2014)

The Economist magazine rightly calls French professor Thomas Piketty the new Marx, although a watered-down version. Piketty’s bestseller (rated #1 on Amazon) is a thick volume with the same title as Karl Marx’s 1867 magnum opus, “Kapital.” The publisher, Harvard University Press, appropriately designed the book cover in red, the color of the socialist workers party.

Piketty cites Karl Marx more than any other economist, even more than Keynes. The professor barely mentions Adam Smith. Instead of the modern scientific name “economics,” he prefers the old term “political economy,” a favorite of radical professors.

And most importantly, Piketty’s focus is on the distribution of income and capital, not the creation of wealth. He’s not so much concerned with the size of the economic pie, but how it’s cut up.

His main thesis is that inequality grows under capitalism, that unfettered free markets make the rich richer and the poor poorer — a standard Marxist position — and that the only solution is to tax the dirty, filthy, stickin’ rich with highly progressive taxes on their income and wealth.

I don’t want to be picky, but Piketty often ignores data that contradicts his theory of growing inequality. For instance, he selectively chooses members of the Forbes magazine billionaires’ list to show that wealth always grows automatically faster than the average income earner. He repeatedly refers to the growing fortunes of Bill Gates in the United States and Liliane Bettencourt, heiress of L’Oreal, the cosmetics firm. “Once a fortune is established,” he claims, “the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size.”

Come again?

I guess he hasn’t heard of the dozens of millionaires and billionaires who lost their fortunes, like the Vanderbilts, or to use a recent example, Eike Batista, the Brazilian businessman who just two years ago was the seventh-wealthiest man in the world, worth $30 billion, and now is practically bankrupt.

Piketty conveniently ignores the fact that most high-performing mutual funds eventually stop beating the market and even underperform. Take a look at the Forbes “Honor Roll” of outstanding mutual funds. Today’s list is almost entirely different from the list of 15 or 20 years ago. In our business, we call it “reversion to the mean,” and it happens all the time.

The professor seems to have forgotten a major theme of Marx, and later Joseph Schumpeter, that capitalism is a dynamic model of creative destruction. Today’s winners are not necessarily next year’s winners. IBM used to dominate the computer business; now Apple does. Citibank used to be the country’s largest bank. Now it is Chase. Sears Roebuck used to be the largest retail store. Now it is Wal-Mart. GM used to be the biggest car manufacturer. Now it is Toyota. And the Rockefellers used to be the wealthiest family. Now it is the Walton family, who a generation ago were dirt poor.

Piketty is no communist and is certainly not as radical as Marx in his predictions or policy recommendations. Many call Piketty “Marx Lite.” He doesn’t advocate abolishing money and the traditional family, confiscating all private property or nationalizing all of the industries. But he’s plenty radical in his soak-the-rich schemes, a punitive 80% tax on incomes above $500,000 or so, and a progressive global tax on capital with an annual levy between 0.1% and 10% on the greatest fortunes.

Why assess a tax of even 0.1% on wealth? It destroys a fundamental sacred right of mankind — financial privacy and the right to be left alone. An income tax is bad enough. But a wealth tax is worse. A wealth tax is Big Brother at his worst. Such a tax would require every citizen to list all his or her assets. The intent is to prevent any secret stash of gold and silver coins, diamonds, artwork or bearer bonds. Suddenly, the privacy guaranteed to Americans by the Fourth Amendment would be denied and produce an illegal and underground black market.

Equally important, a wealth tax is a tax on capital — the key to economic growth. The worst crime of Piketty’s vulgar capitalism is his failure to understand the positive role of capital in advancing the standard of living in the world. As Andrew Carnegie simply said, “Capitalism is about turning luxuries into necessities.” The latest example is the smartphone. It’s the great equalizer. Virtually everyone rich and poor has one, thanks to the ingenuity of entrepreneurs like Steve Jobs. This is democratic capitalism at its best. Income inequality may be growing, but when it comes to goods and services, inequality may be shrinking.

To create new products and services and raise economic performance, a nation need capital, lots of it. Contrary to Piketty’s claim, it is good that capital grows faster than income, because it means people are increasing their savings rate. The only time capital declines is during war and depression, when capital is destroyed.

Piketty blames the increase in inequality on low growth rates. He says return on capital tends to be higher than the economic growth rate. Good, let’s increase economic growth with tax cuts, sensible deregulation, better training/education, productivity and opening trade.

Even Keynes understood the value of capital investment and the need to keep it growing. In his “Economic Consequences of the Peace,” Keynes compared capital to a cake that should never be eaten. “The virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.”

If the capital “cake” is the source of economic growth and a higher standard of living, we want to do everything we can to encourage capital accumulation. Make the cake bigger, and there will be plenty to go around for everyone. This is why increasing corporate profits is good — it means more money to pay workers. Studies show that companies with higher profit margins tend to pay their workers more. Remember the Henry Ford $5-a-day story of 1914? (In honor of its centennial, I’m telling this story again at FreedomFest this July 9.)

If anything, we should reduce taxes on capital gains, interest and dividends, and encourage people to save more and thus increase the pool of available capital and entrepreneurial activity. A progressive tax on high-income earners is a tax on capital. An inheritance tax is a tax on capital. A tax on interest, dividends and capital gains is a tax on capital. By over-taxing capital, estates and the income of our wealthiest people, including heirs to fortunes, we are selling our country and our nation short. You can never have too much capital.

What country has advanced the most since World War II? Hong Kong, which has no tax on interest, dividends or capital.

The great Scottish economist Adam Smith once said, “Little else is required to carry a state from the lowest barbarism to the highest degree of opulence but peace, easy taxes and a tolerable administration of justice.” Moreover, his system of easy taxes and natural liberty would reduce inequality and result in “universal opulence, which extends itself to the lowest ranks of the people.”

My hope is that Professor Piketty will see the error of his ways and write a sequel called “The Wealth of Nations for the 21st Century,” which will quote Adam Smith instead of Karl Marx. Perhaps he will quote this passage: “To prohibit a great people… from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.”

You Blew It! Billionaire Leaves House Empty for 13 Years

Here’s an incredible story that a friend of mine told me. In Las Vegas, his next door neighbor is a Hong Kong billionaire who has owned his mansion there for 13 years. The mansion is worth around $6 million.

It has about $250,000 worth of furnishings… beautiful. Every room is furnished to the hilt… and a $150,000 AMG Mercedes is in the garage.

Even funnier is that every week a pool cleaner comes. Every week, a gardener comes. Every month, a maid service comes. Every month, a pigeon company cleans pigeon poop off of the roof. A limo from MGM comes once a month to collect mail (he’s a High Roller there).

Yet, in 13 years, no one has EVER slept in the mansion.

My friend says the billionaire is “good for the economy.” I say, what a waste. It is a form of conspicuous consumption by the leisure class, as Veblen called it in his classic work.

This image of wealth is terrible for capitalism at a time when millions — even billions — of people are struggling in this world to survive.

I wonder how many other nice homes are left empty in Las Vegas and around the country… homes that could be rented out to needy families.

This kind of story is what leads to resentment and calls for punitive taxes on the rich. The rich need to wake up and start promoting good causes with their money rather than let it sit idly in empty mansions in Las Vegas.

In case you missed it, I encourage you to read my e-letter article from last week about why fearmongers about global warming leave me cold. I also invite you to comment in the space provided below.

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About Mark Skousen

Mark Skousen, Ph. D., is the editor of the monthly investment newsletter, Forecasts & Strategies, as well as three weekly trading services, Skousen High-Income Alert, Hedge Fund Trader and Fast Money Alert. He also is a professional economist, investment expert, university professor, and author of more than 25 books. He earned his Ph. D. in monetary economics at George Washington University in 1977. He has taught economics and finance at Columbia Business School, Columbia University, Grantham University, Barnard College, Mercy College, Rollins College and as a Presidential Fellow at Chapman University. He also has been a consultant to IBM, Hutchinson Technology and other Fortune 500 companies.

View all posts by Mark Skousen →

  • GEOrge Davis

    I am Sharing Skousen (below) because he Rocks ! “KILLING THE GOLDEN GOOSE” (A Tale of The Re-distribution of Wealth) .

    Love Skousen’s Adam Smith quote:

    “To prohibit a great people… from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.”

    The real way to enrich the poor in a free market society is to let the rich become as profitable as legal and honest commerce can make them, not to make them as poor as the poor via re-distribution of their wealth. You cannot make the poor richer by making the rich poorer. The rich don’t put their so called “excess profits” under the bed. They re-invest every penny that they don’t spend on their personal consumption. Re-investment of capital (wealth) creates new jobs for the unemployed and higher wages for the employed. Government cannot create new wealth or additional jobs via the re-distribution of wealth any more than you can become more wealthy by taking a dollar from your right pocket and putting it into your left pocket. In a free market society buyers of goods and services only give the rich more profit if they are both better off for having done so. Redistributing all the wealth of the rich to consumers as Keynesians advocate is like eating all the eggs produced and then wondering why the next generation of productive chickens (and its eggs) has dissapeared. THE POOR CAN’T ENRICH THE POOR. ONLY THE RICH CAN ENRICH THE POOR !

    ONE MUST WONDER, WHY KILL THE GOLDEN GOOSE ???

    Robin Hood was not a hero. He was a GLORIFIED THEIF !

    Geo.

  • jim_wright

    Under the controls of the concept of redistribution there is no insensitive for anyone to strive to do better or to produce anything more than barely acceptable. This concept is one of the biggest con jobs of the last century and is still showing it’s ugly head today. The end result is that everyone is stuck in a mediocre existence except for the “special few”. You can look at any country or group that espouses socialism or Marxism as their economic model and you can plainly see this in practice. As the saying goes, “Some are more equal than others”. Also the lesson from Robin Hood was that the rich in the case shown were not getting rich from their own efforts. They were getting rich by stealing the production of the people of the land in much the same way as all socialist and Marxist get rich off the efforts of their countrymen, because they are the “special ones”.

  • jag57

    Mark Skousen is a smart man, I first met him at a Sound Money Conference in St. Louis, in May of 1990, then in San Jose, Costa Rica, at another conference, Dec, 1990. We also went the the conferences in San Jose, in 1991, 1993, and 1998, the year I retired. I have one of his books, “Economics on Trial.”

  • thepegroup

    I wish I’d learned earlier about “passive” income. Mark gives a great review of Pitekky’s book …. and tells the truth! I’ve told my sons and will tell them again till it sinks in to invest 10% of your wages early on. I started out cutting grass! Here’s my thought. I’ve known too many very happy people who hold, good, modest wage paying jobs that invested small amounts regularly early. They now enjoy great passive income on top of that wage paying job. They don’t have the stress many high level managers endure. Their lives are well organized. They are great employees! The point is that while the sciences and engineering pay good money to start, it is not always guarantied. Song writers and artists have a tough row to hoe in the beginning, but early, smart money management can provide the foundation to allow them freedom to foster the inspiration they desire. Are you tired of Steve Jobs being held up as an example? Me too. But face it. He built his dream in a garage for heavens sake. He wasn’t a financial analyst, engineer, economist, PhD etc. He had NO cred … entails. Give us a break Pitekky. I haven’t read the book, but it sounds like a very depressing story, not one of inspiration or even hope. On the other hand, if you haven’t Greenspan’s book, I recommend it.

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